Will Motion Sensor Maker InvenSense Get Apple Slice?


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Will motion sensor makerInvenSense ( INVN ) soon get its first slice of business from Apple?

If the buzz on Wall Street is on the money, that may well be the case. Some analysts speculate that InvenSense sensors are incorporated inApple 's ( AAPL ) new iPhone lineup announced Sept. 10. Investors will have a better idea if they are when the new iPhone sales kick off in Apple stores at 8am Friday (they start at 12:01 a.m. PT online).

InvenSense makes sensors that track motion on devices such as smartphones, tablets, gaming consoles, digital still and video cameras, and wearable fitness devices. This kind of capability has come into much wider use lately.

InvenSense MotionTracking solutions combine different kinds of motion sensors in a single-chip solution to power these intuitive motion- and gesture-based interfaces. The micro-electromechanical system-based sensors, such as a gyroscope, accelerometer and compass, are combined with mixed-signal integrated circuits.

To date, InvenSense has not announced that Apple is a customer, but there's plenty of buzz expecting that it is.

"There's a lot of talk we're gaining traction with Apple," InvenSense CEO Behrooz Abdi told IBD. "We don't comment on any particular customer out of respect to their product planning."

The company has been on a roll even without the Apple business. Earnings have climbed by at least 14% the past four quarters and sales have risen by at least 28%.

But Apple would be a nice addition to its customer lineup, which includes smartphone hot shot Samsung Electronics, its biggest customer last year. Gaming playerNintendo Co. ( NTDOY ) was No. 2.

Latest Smartphone Features

Most recently, the "talk" regarding Apple has revolved around InvenSense's sensors being incorporated in Apple's new iPhone lineup, which includes the top-of-the-line iPhone 5S and midrange iPhone 5C. The phones will be available in the U.S. and eight other countries on Sept. 20.

Among the features on Apple's iPhone 5S is a fingerprint sensor, called Touch ID. The phone also features a new chip called the M7 motion co-processor. The M7 enables a new generation of health and fitness apps by continuously measuring motion data from the accelerometer, gyroscope and compass.

The company declined to comment on whether its sensors are included in the new iPhones. But Evercore Partners analyst Mark McKechnie speculates they are.

"We won't know for sure until they ship the iPhones and we see the products," he said. "But we think Apple's iPhone 5S highlighted the importance of motion sensing," he said. "That's a big deal for InvenSense. Apple has not been a customer to date, but our best guess is that InvenSense will win some slots with their three-axis gyro in some of the new iPhones."

In an email, Craig-Hallum Capital Group analyst Richard Shannon said the presence of the M7 chip "suggests there has been a big overhaul in how sensors are being used."

It also suggests Apple has "opened up" the design to competition, he adds.

"I think it is more likely InvenSense would win such a competition," he said.

On the flip side, Piper Jaffray analyst Gus Richard wrote in a report he does not expect InvenSense to be in the new iPhone. Rather, he expects it will be in the next iPad, which is expected to be announced at a separate event in October.

Richard sees a lot of growth coming out of InvenSense's current lineup.

"Since the launch of the Galaxy S4, InvenSense has been winning all of the new platforms at Samsung," he said.

Richard adds that, given Samsung's smartphone market share is approximately 32% and Apple's is about 14%, he believes "traction at Samsung is far more impactful to estimates than Apple."

InvenSense's third-quarter revenue guidance calls for 22% to 25% growth quarter over quarter, he adds.

"We believe the majority of this growth will come from the ramps of the Samsung S4 mini, Samsung Galaxy Note 3 phablet, Nintendo, and tablets from Apple,Google ( GOOG ) andAmazon ( AMZN )," wrote Richard.

Meanwhile, InvenSense has been faring handsomely on the financial front. First-quarter earnings grew 40% to 14 cents a share. Sales climbed 43% to $55.9 million.

Sales rose as the company once again shipped a record number of units, Abdi said in a statement. He expects the company to ship a record number of products in the current second quarter, "growing unit volumes and revenue significantly."

A Better Picture

During the quarter, it saw strength in unit volumes of its optical image stabilization products (OIS) as well as in emerging markets such as China in smartphones, where both attach rates and shares of its products increased, Abdi said on the first-quarter conference call.

Abdi told IBD that OIS is a "significant new market" that's contributing to the company's growth. OIS goes into the smartphone inside the camera module to compensate for hand movements. InvenSense's chip enables image stabilization. As the hand moves, it detects it, sends a signal to the phone and it's able to adjust the lens to compensate for it, Abdi says. InvenSense's OIS product in smartphones such as the HTC One phone.

Abdi, who has been CEO since October 2012, has mapped out a "multilayer growth strategy of market share increases, new content and new markets.

"Our growth strategy is to continue to gain share in established markets like cellphones and gaming," he said. "We intend to bring new content to cellphones with new features and new products. We're also very focused adjacent markets such as wearable devices."

InvenSense is also moving into other markets such as industrial and autos.

Abdi says he's "excited about new markets such as health and fitness with wearable devices."

MotionTracking devices can accurately detect a range of human body motions to enable activity monitoring functionality in fitness devices. Wearable sensors in health monitoring and sports and fitness allow for precise tracking and monitoring of body motion and more sophisticated applications providing users with new levels of valuable information.

InvenSense competes with semiconductor makers.STMicroelectronics NV (STM) is its main competition. Others includeAnalog Devices (ADI) and Panasonic.

InvenSense differs from its rivals in a few ways.

"We're not cheaper," said Abdi. "We're a little more expensive. But customers are willing to pay for our value because of the strength in the size, performance and accuracy of our product."

Another difference: While many of its rivals make their products in their own factories, InvenSense uses a fabless business model, working with third parties to manufacture its products. The critical test and calibration functions are performed in its wholly owned subsidiary in Hsinchu, Taiwan.

Being fabless allows InvenSense to be more "flexible" in its supply chain, says Abdi. And it can add capacity and respond to the market faster.

It's able to have a "virtually unlimited supply" because of its partnerships with the large foundries, which have a lot of wafer capacity.

"Being fabless affords them cost efficiencies and a less capital-intensive business model," Shannon said.

Analysts polled by Thomson Reuters see fiscal 2014 full-year earnings rising 20% to 71 cents a share. They project a 30% rise in 2015.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Investing Ideas
Referenced Stocks: AAPL , AMZN , GOOG , INVN , NTDOY

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